6 Investment questions to ask your adviser
And the stock answers you really must challenge
In this Insight, I’ll share 6 essential questions for you to ask your adviser/wealth manager if you want to have a meaningful conversation about your investments.
You can also use these questions when employing an adviser for the first time, or if you change your current one.
There’s a lot of content in here: Time to read: 5 to 15 minutes depending on your speed.
It’s good to challenge, but not always easy
If you’ve not yet had these sorts of conversations, have them now, and quickly.
I’ve been suggesting challenging questions to help you find better advisers for some time now – starting with my (2013!) book, ‘Who can you trust about money?’ and later, as illustrated in this 2017 Insight although I accept that I’ve not always handled this issue as delicately as, I’ve tried to, here 😉
Anyway, I just hope these messages aren’t too late for you.
Of course, I realise that not everyone feels comfortable asking their adviser challenging questions. Your relationship with your adviser is based on mutual trust, and you don’t want to question that unnecessarily.
I understand too, that there may be other reasons why many (advised) investors prefer to sit quietly and accept the answers they’re given by the advisers they’ve chosen.
Indeed, to do otherwise is to question our own judgement, (in appointing that adviser) and that’s never an easy thing to do – especially when most of us come into this world pre-loaded with a ‘confirmation bias’ that gives us a preference for finding reasons to support our beliefs and decisions rather than challenging them!
You might also agree that we British are particularly inclined to politeness and tend to avoid asking difficult questions for fear of ‘rocking the boat.’
We’re, generally, less direct communicators than our friends in the USA and Australia, for example.
Tho’ I hope you’d not accuse me of indirect communication.
This site is about education and to achieve that, we must cut the crap, right?
Joking aside, what I hope to show in this Insight, is that an overly friendly approach to your adviser, risks you having too many ‘old school’ chummy chats (which were past their ‘best by’ date in 1986) and leaving you either confused or misled (or both) about your money.
Of course, you might reasonably ask why you’d want to challenge your adviser on boring details or matters of fact?
After all, almost all stockmarket-linked investments *have* delivered extraordinarily good returns for the past decade, right?
Exactly, and that’s even more reason to take these risks seriously now.
As Warren Buffet once said:
As an aside, if you follow Buffett, you might want to note that he’s not a keen buyer of shares or corporate bonds at the moment.
So, there’s never been a more critical time for you, as an investor, to take control of your money and, if you’re unlucky enough to have one, your misleading and overconfident adviser too.
Do all advisers mislead us on Investment risk?
No, absolutely not.
And let me make my views totally clear on this.
There are some superb financial planners and wealth managers out there, who give solid advice at a very fair price.
You just need to learn what to look for, and then go and find an excellent adviser because they can make a massive difference to your wealth over time.
No, I’m not going to stand in the street, applauding the efforts put in by all financial advisers, but I do applaud the valuable work done by the good ones… and I do my level best to expose those who mislead you.
That’s what this Insight is about.
One case of misleading advice is one too many in my book. It undermines trust in all advisers and simply isn’t fair on those doing good, professional work.
Not all misleading is deliberate!
Finally, before we get to those key questions to ask your adviser, I also think you need to know that not all ‘misleading information’ on investing is given with deliberate intent to mislead you.
Yes, I know that sounds wrong, but please bear with me.
You see, some misleading investment ideas are produced by marketers at Investment fund managers.
And some financial advisers assume these, highly polished, guides have been carefully constructed and are balanced and ‘fair’. So, they pass them on to you.
Now you might say that advisers should be wise enough not to use misleading marketing materials, and I’d agree. But, let’s be honest, not everyone’s great with numbers. And some advisers will ignore errors in marketing materials if they like the story it tells!
That’s just human nature.
Besides, misleading marketing materials should not be issued by the fund managers in the first place, right?
Right, and the UK’s regulator ‘The FCA’ should do a better job of policing any misleading marketing too, especially if folk like me take the trouble to point it out to them!
Perhaps, you can help here – and point out misleading marketing to the FCA when you see it?
In the meantime, I’ve started speaking directly to the senior investment managers at fund management groups, in an attempt to stop this misleading marketing, myself.
And, I’m pleased to report some success, with a world-leading fund manager too. So, only another 50 to go!
What’s interesting is that some of the highly educated and intelligent, senior fund managers aren’t even aware of the ‘sketchy’ sales stories that their marketing peeps are pushing out into the market.
I know that sounds incredible, but having worked inside such a group for 25 years, it doesn’t surprise me.
The left-hand/right-hand issue clearly continues in big corporations.
Summary so far
Despite this being 2020, there is still a lot of misleading information about the risks of investing out there.
If you’re an investor, you’ve probably seen some of it, and your investment decisions might have been influenced by it too. And this really isn’t good enough, is it?
Of course, the vast majority of misleading information comes from scammers and you must be on your guard against them.
However, just because your adviser is regulated, you shouldn’t let your guard down.
Yes, a good proportion of regulated advisers do great work but, sadly, there are some less scrupulous (or less knowledgeable) advisers who give out misleading information too.
Helping you identify who misleads you about money, and what you can do about it, is a core part of what I help people with today – and I hope you agree, it’s a valuable service.
And if you only take one thing from this post, make it this:
Not all advisers are the same.
Financial advice varies a lot, in both quality and price.
You don’t need to know much, but must know enough to choose one good enough for you
Now, to those questions for your adviser?
Okay, so here’s how I hope to help you decide if your adviser is giving (or, would give) you incomplete, or misleading answers to essential investment questions.
Below you’ll find a fictitious example of a conversation between an investor and their adviser.
I’ve, slightly, exaggerated the bad behaviour to make it obvious for you to spot – hope that’s okay.
The investor and adviser are discussing the critically important question of:
‘What to do about your investments, now?’
And, if there’s a problem with the investment advice you’re getting, this example should raise alarm bells in your mind.
Later in this Insight, you’ll find the questions to ask your adviser that might help you ‘iron out’ any worries about the advice you’ve been given… or help you decide that you need a better adviser.
If, after reading this, you identify no problems, that’s wonderful.
I just hope you’ll share it with friends and family, in case the advice they are getting is not as robust as yours.
This is, after all, an important question of: ‘Who can you trust about money?’ and my aim, as always is to help you make more informed decisions on that.
The example conversation
In this example, the Investing Client (‘Sam’) invested most of their life savings with a wealth manager last November 2019.
In addition to their invested monies, in November, Sam also had sufficient emergency funds (in readily accessible cash deposits), which have since been heavily drawn down to cover Sam’s reduced income during the Covid-19 lockdown.
Based on Sam’s attitude to investment risk, the monies were mostly (about 80%) invested into stockmarket based funds.
And, today, 6 May 2020, Sam, who is nervous about the prospects for his/her money, phones his/her adviser (Phil) for a chat.
Here’s how the conversation went:
Sam (the client)
‘Hey Phil, thank you for your note about the 10% drop in the value of my investments.
I think at some point that drop might have reached 20%, and, to be honest, that worries me.
So, I’m wondering if we need to do something to change my investments?’
Phil (the adviser)
Hi Sam, good to hear from you.
Hopefully, you received our Investment Newsletter in March, which looked at how all previous epidemics have had little or no effect on stock markets over the medium term?
Umm, yes, I vaguely recall that, but…
Good, and hopefully, you saw our April update, which explained why we’re confident that we’ll see a ‘V’ shaped rebound in stock markets quite soon – as the lockdowns come off and people get back to work.
As we said in that note, the Chinese economy is already bouncing back strongly.
Umm, yes… I vaguely recall that too, but…
Right, so obviously the last thing you want to do is sell anything now.
Do you also recall that ‘missing the best days’ information guide (from XYZ fund managers) that I sent you when you first invested with us?
Umm, yes… I vaguely recall that, too, but never understood how it could make sense.
In any event…
Okay, well let me remind you.
In a nutshell, what it showed was that if you sell your stockmarket-based funds, you risk ‘missing some of the best days’ in the markets.
That could destroy your investment returns which, in turn, could ruin your chances of achieving your financial life goals.
So, you can’t expect us to recommend you do that.
Umm, no, I guess not, but…
Good, then can I recommend that you read that guide again today to get clear on just how much you might lose if you take your money out of the markets.
Your longer-term losses could be eye-watering even if you only miss out on a few of the best days.
So, that’s it then?
Nothing more to worry about?
I don’t think so unless your long-term plans for your money have changed…
… have they?
No, nothing significant has changed in terms of my goals for this money.
There you are then.
The plan we set up last year was designed to help you achieve those goals.
So, if nothing’s changed, we just need to leave things as they are.
Right, umm, okay then.
Sorry to trouble you and thank you so much for your time, I know you must be busy.
No trouble at all, Sam, that’s what we’re here for.
Let’s talk again in November at your first annual review.
Take care now…
End of conversation.
What did you think of that?
Okay, so what did you make of that conversation?
Did it all seem reasonable to you?
No, me neither.
So, let’s pick it apart, one comment at a time, and develop some questions for you (or your friends and family) to ask your advisers if you’ve received anything like those, ‘brush off’ answers.
And if with the questions I give you here, you’re unable to get much better answers; you might at least gain more clarity on what you need to do next!
Oh, and don’t worry if you’ve already been in Sam’s shoes and had that conversation, you can always go back with these questions.
Ongoing advice is, after all, what you pay those ongoing advice fees for, right?
On the question of ‘what’s changed?’
This question from Phil, towards the end of my example conversation, is perfectly valid.
If your circumstances change, it’s essential to review your financial plan to see what might need to change there too.
However, the question of ‘what’s changed’ covers a whole lot more than just your longer-term life goals.
Your adviser should ask about your emergency fund too because if that’s reduced, say to cover lost income during the lockdown, you may need to dip into your longer-term investments to cover future (or continued) emergencies.
Your adviser should also be concerned about any changes to your capacity for investment risk (your CFR) on each of your life goals – esp. if your emergency fund is reduced or gone.
Your adviser should also be concerned if any of your nearer-term/essential life goals are now at risk because of the reduced value of your investments.
The best investment advisers pay close attention to your Capacity for Risk, on each of your goals.
A less competent adviser might have ignored your CFR. And, if that’s the case, you need to know and get your investments properly reviewed, ASAP.
So, go ahead and ask your adviser to show you how they took your Capacity For Risk (on each of your financial life goals) into account in their investment recommendations
And be careful with the language here.
Your Capacity for Risk is something completely different (and vastly more important) than your generalised Attitude to Risk, or ATR.
So, be very clear in your question and ask:
And make it clear that you want this question answered in relation to your capacities for investment risk – not your generalised Attitude to Investment Risk (ATR) which was probably determined using a standard questionnaire.
Is this a fuss about nothing?
The problem is that some advisers refuse to take the issue seriously.
So, you need to check whether yours is one of those.
On the claim that ‘we’ve seen pandemics before’
If you received a similar sort of warm reassurance to Sam, on how past pandemics have had little impact on stock markets, perhaps with a similar chart, I suggest you go back and ask your adviser this question:
I’d hope that any adviser who issued this message would now admit that they were premature to do so – and that Covid-19 and this worldwide lockdown is on a completely different scale.
What we’re living through is an unprecedented economic shock in modern times.
For goodness sake, the world economy has been largely shut down, and in the USA alone, more than 30 million people lost their jobs in just 6 weeks!
Many companies in vulnerable sectors of all economies are being closed down, or significantly reduced in size. And profits flowing to shareholders are being savagely cut.
This really is different, very different, this time.
On the confidence around a V-shaped recovery
Similarly, if your adviser sent you a confident statement that the V-shaped recovery (the bounceback) will ‘be along shortly’, I suggest you ask them:
I know you, and your adviser and millions of others, want to know… but no one can know.
The only thing we do know is that economic growth is just too complex to forecast- and all good economists know this to be true, as the great John Kenneth Galbraith said,
“the only function of economic forecasting is to make astrology look respectable.”
So, you need to take any confident economic forecasts, from anyone, with BIG pinch of salt.
No one knows.
As for the evidence from China…
Well, that’s not as good as some will tell you.
Early evidence from China shows how cautious consumers there have become.
“The SARS epidemic in 2003 and the Spanish flu in 1918 had three peaks before subsiding. Relapses are not uncommon,” said Sung Won Sohn of SS Economics.
“China claims that production is approaching about 80 per cent of the capacity, but subways are less than half full. In Macao, the casinos have reopened, but the business is still down 80 per cent from the previous high.”
All of this points to 2020 as the year of heavily curtailed spending as consumers are out of work, or fearful of losing a job and businesses take extreme caution.
Goldman Sachs expected business investment to decline by 27 per cent.
In short, we are living through an almighty economic shock and we need to be honest about the potential investment risks that arise from that.
On missing the best days
If your adviser has sent you this, tiresome, marketing guff you need to challenge them on it.
Fortunately, I’ve done the work and can make that easy for you.
Just send them a link to this Insight which exposes the myth of the ‘missing the best days’ story and ask them:
I’ve been running this ‘myth buster’ Insight (and telling the FCA about it) for years now.
So, I’m hugely disappointed to see it still being produced by fund management houses and sent to thousands of investors.
I know the rules on what unfair and misleading marketing looks like; I spent 25 years in Financial Services, including a role as head of Investment Product development at a Blue Chip Investment house.
And there’s no question in my mind. The regulator should stamp this marketing out.
It’s just stupid, and yes I do mean ‘stupid’, to say that by choosing to be out of the market at certain times, you will only miss out on the best days, while still being exposed to the worst days.
Here’s the simple truth:
If you come out of the markets (or reduce your exposure to them) for a while, you reduce your risks of losses in the short term. And the price you pay for that short term peace of mind is the extra return (above safe assets) that you might reasonably expect to earn during the time you’re out.
How much is the extra return that you might ‘miss out’ on?
Any good, competent adviser, will tell you what a small number it is.
You must decide, with the help of your adviser if you have one, whether you want to park some of your funds in safe assets for a short period of time – and which ‘safe’ funds to use for that.
In theory, your prospective loss of extra return is very little.
That said, timing does matter, of course. And, if you’re unlucky enough to pull your money out of the markets at the bottom of a market crash, you will obviously ‘miss out’ on a sudden bounce back if there is one.
But no adviser can be sure if and when that might happen. As the very old investment adage goes…
‘You can only recognise a bottom, after it’s walked past you!
If your adviser has used this misleading story on you, just point them to my Insight on ‘Why it’s okay, to miss the best days’ and, in particular, draw their attention to the evidence on when most of the best days have occurred in the past.
Yes, most of those ‘UP’ days happened in big ‘DOWNWARD’ trending, bear markets!
So, don’t believe the missing the best days story. It’s just a very misleading sales device.
The simple truth about stock market investing is this.
When you’re out of the market you miss both good and bad days – and that’s obvious when you think about it.
So, send your adviser that link and ask them to stop sending you nonsense.
If your attitude to risk has changed, so you want to take less risk, tell your adviser this and ask them to put more of your money into safer assets quickly.
Am I suggesting you do that?
No, I’m not advising you – I know nothing about you – and that’s not what I do, in any event.
I just want you to make better decisions about money – and you can’t do that based on misleading information.
On market valuations – before Covid-19
The final question I suggest you put to your adviser is about what they believed were the prospects for stock market returns – before Covid-19 came along to change things.
If your adviser was aware that stock market prices, especially in the USA, were extremely stretched on various valuation measures, and took this into account in their investment recommendations, you might have less to worry about than others.
Some advisers, however, ignore market valuations and instead hold to a belief that stock markets are always priced perfectly to offer good long term returns.
So, if your adviser is in this second group, your money might have been exposed to more risk than with an adviser from the first group, if they’d ‘toned down’ your risk exposure to take account of high valuations.
What question should you ask?
If they ignore market valuations altogether, even at the extreme levels we’ve seen in the past couple of years, you must decide if that adviser is right for you.
The challenge that you (and, indeed, your adviser) face is the fact that there are broadly two schools of thought on how stock markets are priced.
Yes, I know that sounds absurd but it’s true, as I described here. There are two, very different, schools of thought about what drives stock market prices. And they both come from Nobel Prize winners!
So, if your adviser is in (what I call) the ‘eternal optimist’ camp I suggest you read views from others who look more closely at the downside risks in stock markets. And you can find some suggestions for who else to follow here
Summary, and next steps
In this Insight, I’ve covered a lot of Investment questions for your adviser.
So, now, here’s one for you… and, before you answer, try to set the personality of (and friendship you have with) your adviser to one side.
You need a clear head on this one.
Did anything you’ve read here raise doubts in your mind about the quality of investment advice you’re getting?
If yes, put the relevant questions from above (or all of them) to your adviser today.
If you have a good adviser they will have no trouble in answering these questions.
Indeed, I suspect they’d welcome your questions as an opportunity to evidence the value of the advice they give.
If on the other hand, your adviser struggles to answer some of these questions then you must decide if they’re good enough for you.
The truth is that some advisers look only at your generalised attitude to risk – and make no adjustment for your capacity for risk on each of your goals. And there’s no question that this is a serious oversight.
Some other advisers, who lean towards the ‘Price is Right’ school of Stock Market pricing, might also ignore market valuation levels when recommending your exposure to risky assets. You must decide to what extent that concerns you.
Whatever you decide, I hope you’ll keep coming back here, for more evidence-based, ideas for more control of your money, and your adviser if you have one.
So, be sure to sign up to my newsletter before you go.
And, thanks for dropping in,
Thanks for dropping in
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